An explainer: TCFD for SMEs

July 2023

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The Taskforce for Climate-Related Financial Disclosure (TCFD) was established to provide a comprehensive framework for companies to assess and disclose their climate-related risks and opportunities. 

The TCFD was launched in 2015 - same year as the Paris Agreement - by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. In its own words: “One of the essential functions of financial markets is to price risk… Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.” In other words, because climate change has a significant impact on the long-term value of a company, allocators of capital need to understand a company’s potential climate-related risks to understand investment risks. And to put it another way, climate change and the financial health of companies are inextricably connected.

The 2015 Paris Agreement set one goal for state and non-state actions: achieve net zero by 2050. Following that mandate, commitments were made by the public and private sector. But in making those commitments, the requirement to track, report and disclose has historically been voluntary. The TCFD has been considered international best practice and began as a voluntary set of recommendations. It has quickly become part of the regulatory framework in many jurisdictions, including the European Union, Singapore, Canada, Japan and South Africa. New Zealand and the United Kingdom are mandating climate risk disclosures in line with the TCFD by 2023 and 2025 respectively. This is part of the growing efforts to address global climate change thoroughly. Beyond government alignment with the TCFD, multilateral standard setters like the International Financial Reporting Standards (IFRS) are also incorporating TCFD recommendations in the much-awaited (ISSB) framework.

Applicability of the TCFD

Over 1,300 of the largest UK-registered companies must comply with the TCFD - it’s important that businesses of all shapes and sizes understand their applicability under the regime. The TCFD guidelines are applicable to organisations across various sectors and industries, including publicly traded companies, private corporations, and financial institutions. By adopting the TCFD recommendations, companies of all sizes can enhance their understanding of climate risks and opportunities, leading to more informed decision-making.

As of April 2022, UK companies with the following criteria are obliged to TCFD-aligned reporting:‍

1. All UK companies that are currently required to produce a non-financial information statement:

  • UK companies that have more than 500 employees and
  • Transferable securities admitted to trading on the UK regulated market, banking companies or insurance companies (Relevant Public Interest Entities (PIEs)

2. UK registered companies with securities admitted to AIM with more than 500 employees.

3. The UK registered companies which are not included in the categories above have more than 500 employees and a turnover of more than £500m

4. LLPs which have more than 500 employees and a turnover of more than £500m

The TCFD’s focus is reporting on the impact an organisation has on the global climate. There are 11 disclosure recommendations that span four different areas: governance, strategy, risk management, and metrics and targets. Zeroing in on metrics and targets - it’s important to highlight that the disclosure of Scopes 1, 2 and 3 are a line item for alignment with the framework. 

The TCFD has also provided seven principles for adequate disclosures:

  • Represent relevant information;
  • Be specific and complete;
  • Clear, balanced and understandable;
  • Consistent over time;
  • Comparable among others within a sector, industry or portfolio;
  • Reliable, verifiable and objective;
  • Provided on a timely basis.

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Importance of the TCFD

Enhancing Risk Management: By incorporating climate-related risks into their financial reporting, companies can better identify and manage the potential financial impacts of climate change. This allows businesses to develop strategies that build resilience and mitigate risks, ensuring long-term sustainability.

Facilitating Investment Decisions: The TCFD guidelines enable investors to make more informed decisions by providing standardised and comparable information on climate-related risks and opportunities. This transparency allows investors to allocate capital towards companies that are better prepared for the transition to a low-carbon economy, driving sustainable investments and fostering economic growth.

Encouraging Innovation and Transition: The TCFD encourages companies to consider climate-related opportunities, spurring innovation in clean technologies and sustainable practices. By integrating climate considerations into their strategies, businesses can adapt and thrive in a changing world, while contributing to the broader goal of reducing greenhouse gas emissions.

Strengthening Stakeholder Engagement: The TCFD framework promotes enhanced communication between companies and their stakeholders, fostering trust and accountability. By disclosing climate-related information, companies can address the concerns of shareholders, customers, and communities, leading to more effective engagement and collaborative efforts to address climate change.

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